Nov. 14 (Bloomberg) -- Target Corp., the second-largest U.S. discount chain, posted the biggest profit gain in two years on sales of food and holiday toys.

Third-quarter net income rose 16 percent to $506 million, or 59 cents a share, beating analysts' estimates. Profit was $435 million, or 49 cents, a year earlier. Revenue increased 11 percent to $13.6 billion, Minneapolis-based Target said today in a statement.

Sales at Target stores open more than a year climbed 4.6 percent as the company offered groceries in additional outlets and introduced organic foods after Wal-Mart Stores Inc. expanded a line of similar items. Credit card revenue grew 21 percent. President Gregg Steinhafel said today Target anticipates winning ``substantial and profitable market share'' during the holidays.

``Target's doing a good job resonating with its customers,'' said Rick Rubin, an analyst at Mercantile Bankshares Corp. in Baltimore, with $22 billion in assets including Target shares. ``I think their retail business is doing very well on top of years of strong performance.''

Shares of Target rose $1.40, or 2.4 percent, to $59.16 at 4:13 p.m. in New York Stock Exchange composite trading. The stock has gained 7.6 percent this year, while Wal-Mart is up 1.8 percent. Target operates 1,444 stores.

Baby and men's clothing, toys and food were among the best selling categories in the quarter, Steinhafel said during the company's earnings call with analysts and investors.

Forecast

Chief Financial Officer Douglas Scovanner forecast fourth- quarter earnings ``consistent with'' analysts' median estimate of $1.26 a share. He projected earnings will rise to $3.17 for the year ending in January. Analysts, on average, estimate $3.13.

Deborah Weinswig, an analyst at New York-based Citigroup Inc. and Institutional Investor's top-ranked retailing analyst for 2006, estimated profit of 55 cents in the quarter. That matches the average estimate of 21 analysts surveyed by Thomson, which doesn't disclose the basis for its projections to Bloomberg News.

Wal-Mart, the world's largest retailer, said earlier today third-quarter net income rose 11 percent to $2.65 billion. Sales climbed 12 percent to $83.5 billion, the Bentonville, Arkansas- based company said.

Since October, Wal-Mart has cut holiday-season prices on toys, electronics and appliances as it posted lower-than- expected sales gains last month.

Matching Discounts

``Any time a major competitor starts slashing prices, you have reason to have some concern,'' Rubin said. Target's policy has been to match Wal-Mart on promotions, he said.

The company said it would meet the $4 price Wal-Mart is offering for a month's supply of 314 generic drugs in 27 states. Target's pricing should have no impact on profit, Steinhafel said, as gains in traffic, sales and new prescriptions compensate for the reduction.

Target's customers won't defect, Rubin said. ``Target seems to have more of a connection to its consumer.''

Credit card revenue grew to $414 million from $343 million in the quarter, Target said.

``If one were to exclude the credit-card contribution from pretax earnings, they would have grown just 4 percent versus the reported 13 percent,'' wrote Robert Buchanan, an analyst at A.G. Edwards & Sons Inc. in St. Louis. Buchanan rates the shares ``hold.''

Not Enough PlayStations

The company's 4.6 percent same-store sales gain marked the 12th time in 15 quarters its growth outpaced Wal-Mart.

Wal-Mart has forecast no increase in same-store sales for this month. Target said yesterday November sales are rising within its projected range of 4 percent to 7 percent.

Target is ``disappointed'' with its holiday allocation of Sony Corp.'s PlayStation 3 video game, Steinhafel said during the call. The company has ``significantly more'' of Nintendo Co.'s new game consoles, he said.

Target also has some ``supply availability issues'' preventing it from expanding its new Archer Farms organic food line as quickly as it would like, he said.

Wal-Mart this year is adding 400 organic food items, part of its effort to upgrade stores and merchandise. The retailer is completing this month the first two-thirds of renovations planned at 1,800 stores.

Wal-Mart Renovations

Steinhafel said Target's sales haven't suffered from improvements at Wal-Mart stores. ``We really don't expect it to have any impact on our business,'' he said.

Target's gross margin, or the percentage of sales left after subtracting the cost of goods sold, widened to 32.4 percent from 32.3 percent. Selling, general and administrative expenses rose to 24 percent of sales from 23.5 percent, the company said.

Target said it will probably complete its $5 billion share buyback program, begun two years ago, by the end of 2008. It's spent $3.4 billion for 71 million shares so far.

Net income for the first nine months rose 14 percent to $1.7 billion as revenue grew 12 percent to $39.8 billion.

Target has exceeded analysts' estimates in three of the prior four quarters. Of 21 analysts tracked by Bloomberg in the past year, 15 rate Target shares ``buy'' and six say ``hold.''

To contact the reporters on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net.

Last Updated: November 14, 2006 16:28 EST